The 2018-2019 holiday season promises to be brutal for department stores like Macy’s (M). For example, Sears (OTMK: SHLD) declared bankruptcy in mid-October.

Meanwhile, Macy’s faces falling revenues and intense competition from Amazon (NASDAQ: AMZN) and TJX (NYSE: TJX). For example, Macy’s revenues fell by 1.14% in 3rd quarter 2018. That reversed two quarters of revenue growth at the department store icon, the first in several years.

Can Macy’s (M) Compete with Amazon?

Statista calculates that Macys.com sold $3.49 billion worth of fashion apparel while Amazon sold $2.181 billion worth of fashion in 2017. Thus it makes sense for Macy’s shutting down its stores and becoming an online retailer.

On the other hand, the threat Amazon poses to Macy’s is growing. For instance, Morgan Stanley estimates Amazon is on track to becoming America’s top apparel retailer by the end of 2018.

Hence, Amazon will dominate apparel sales in time for the 2018 holiday season. Amazon controls 7.9% of the apparel market. Therefore, it is the number two clothing retailer behind Walmart which had 8.6% of the market.

Hence, Amazon owns the general clothing business, but it has not cracked fashion–yet. Amazon is making a big fashion push; however, by selling items like Christian Dior sunglasses and Louis Vuitton bags.

Amazon is winning the Apparel Wars

In addition, Amazon is rolling out new fashion private labels such as Lark & Ro. Not surprisingly, Amazon dominates sales of basic clothing items like underwear but struggles with fashion.

I conclude that Macy’s (M) is holding its’ own with Amazon in fashion but it’s losing the clothing battle. Thus Amazon is winning the biggest battle where the most money is at stake.

Under those circumstances, Macy’s will have to change its entire business model to survive. For instance, Macy’s could become a fashion-only retailer or an online retailer. A smart move for Macy’s could be to dump everything but fashion.

Is Macy’s (M) Making Money

Macy’s (M) needs to consider changing everything because of limited resources. For instance, Macy’s recorded an operating income of $67 million and a net income of $166 million for 3rd Quarter 2018.

Macy’s is making despite the shrinking revenue. It recorded a gross profit of $2.252 billion on revenues of $5.571 billion for 3rd Quarter.

However, Macy’s is not generating much cash, it reported a free cash flow $69 million and an operating cash flow of $222 million for 3rd Quarter 2018. In addition, Macy’s reported $1.068 billion in cash and equivalents on August 4, 2018.

Meanwhile, Amazon recorded cash and short-term investments of $29.765 billion on 30 September 2018. Thus, Amazon’s cash is almost 30 times Macy’s cash.

I have to wonder how Macy’s can compete against Amazon under those circumstances. If Amazon is Macy’s largest direct competitor, Macys does not stand a chance.

How many stores will Macy’s Close?

A logical conclusion is that Macy’s (M) will have to close more stores to survive.

Macy’s got through 2018 with no major store closings, but I think the situation cannot last. In detail, Macy’s operated 629 full line department stores at the end of 2nd Quarter 2018. Moreover, Macy’s closed just one full-line store in the first two quarters of 2018.

There is a lot of room for store closings at Macys; for instance, the retailer operated 867 discount and department stores at the end of 2nd Quarter 2018. I predict Macy’s will announce another round of store closings if it has a bad holiday season.

Is Bluemercury the future of Macy’s (M)?

Interestingly, Macy’s opened quite a few stores in 2018. For instance, it opened more than a dozen Bluemercury stores in 2nd Quarter 2018.

A likely occurrence at Macy’s is redirecting resources from department stores to Bluemercury. To explain, Bluemercury is a chain of luxury beauty stores Macy’s operates in upscale communities like Burlingame, California. Notably, Bluemercury is outside of Macy’s core competency of clothing retail.

Macy‘s (M) could leverage Bluemercury into a chain of combination salons and ship-to-store pickup for online orders. For instance, Nordstrom (NYSE: JWM) is experimenting with Nordstrom Local in Los Angeles. Each Nordstrom Local contains a salon, services like tailoring, pickup for ship-to-store orders, and a juice or wine bar.

Like Nordstrom, Macy’s is betting that luxury brands will be Amazon proof. The hope is that America’s growing upper classes will still pay extra for a luxury shopping experience.

How safe is Macy’s (M) Dividend?

Under these circumstances I have to wonder how safe Macy’s dividend is. Macy’s has reported seven years of dividend growth despite the retail apocalypse.

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Macy’s investors enjoyed a dividend yield of 4.13%, an annualized payout of $1.51, and a payout ratio of 38.4% on 8 November 2018. That’s superb for a $37.78 a share stock.

Macy’s is planning a 37.7¢ dividend for January 2, 2019. However, that dividend has not increased since June 2017.

Under these circumstances, Macy’s is a respectable dividend stock, but it is too risky for long-term investment. For instance, I think the Macy’s dividend will soon decrease or disappear.

My suggestion is to stay away from retailers like Macy’s until we see how the retail apocalypse shakes out. Macy’s (M) future is just too uncertain for this department store operator to be a value investment.

On the other hand, Macy’s (M) could be a great stock for speculators to short in today’s chaotic retailer environment.